When exporting items that fall under the control of various U.S. regulatory and enforcement agencies such as the Bureau of Industry and Security (BIS), Office of Foreign Asset Control (OFAC) and / or Department of State, most exporters are well aware of the importance of complying with those departments regulations as well as the U.S. Export Administration Regulations (EAR) and how not doing so can lead to a whole boatload of trouble for the shipper. Exporters are knowledgeable about the necessity to properly classify their item and the need to provide the correct information and documents required to export possibly controlled items to insure their shipment moves trouble free.

However, in spite of the due diligence taken with determining the licensing requirements of a physical export, there is a way to easily and inadvertently violate export regulations for controlled items without ever crossing an international border, in fact without the item ever actually leaving the exporters office. How? By means of a deemed export.

What is a “Deemed Export”? As defined in the EAR §734.2(b)(2)(ii), an export of technology or source code (except encryption source code) is “deemed” to have taken place when it is released to a foreign national within the United States.

When does a release of technology occur? EAR §734.2(b)(3) states, “Technology is “released” for export when it is available to foreign nationals for visual inspection, when technology is exchanged orally, or when technology is made available by practice or application under the guidance of persons with knowledge of the technology.”

Who is a foreign national? All persons in the U.S. as tourists, students, business-people, scholars, researchers, technical experts, sailors, airline personnel, salespeople, military personnel, diplomats, etc. These persons are all subject to the “deemed export” rule, even as employees of the U.S. entity. There are exceptions when the foreign national has been granted permanent residence (so called ‘Green card’ holders) evidenced by the issuance of a permanent resident visa, is granted U.S. citizenship, or is granted status as a “protected person” under 8U.S.C.1324b(a)(3). Protected persons would also include political refugees and political asylum holders that have satisfied the requirements of 8U.S.C.1324b(a)(3).

Without proper care and forethought it is very easy to violate the deemed export rule because a deemed export can occur in the most mundane of ways; allowing access or use of technology or source codes in the process of doing research or training, reading of technical specifications, plans, blueprints, performing visual inspections, providing technical assistance, tours of laboratory, manufacturing or R&D facilities, or during an oral exchange of information between parties if any one of those parties involved any of these actions is a foreign national. These types of violations can occur in any environment; at the office, at a university or college, around the water fountain, in the coffee room, literally anywhere access to, or discussion of technology or source code occurs and a foreign national is present.

In accordance with the deemed export rule U.S. persons must apply for an export license when two specific conditions are met; the U.S. person intends to transfer controlled technology to a foreign national in the United States, and transfer of the same technology to the foreign national’s home country would require an export license.

For example, when a U.S. manufacturer or distributor presents a PowerPoint containing information about a controlled item and that presentation has in attendance a foreign national in any capacity, the presenting entity must consider whether a license is required under the EAR and its deemed export rule.

How to determine whether a license is needed? The first step in determining whether a company or organization is dealing with a possible deemed export is to ascertain whether the technology is subject to the EAR and the proper classification for the technology (including source code). Disregarding for the moment embargoes and / or other trade sanctions, the presiding export control regulations are based on the technology itself; determining whether its use is commercial, military, or dual use. For each classification, and within the applicable regulation, the level of control for technologies is quantified.

The second step in the process is to establish the citizenship of any foreign national who may come into contact with the technology. Rule of thumb; if the physical export of the technology to the foreign national’s home country is prohibited without a license, then the transfer of that technology to the foreign national while within the United States is equally prohibited without a license.

The next step is to determine whether any exemptions may apply to the deemed export. What is a license exception? Defined under Part 740 of the EAR an exemption allows a U.S. person to export or re-export, under stated conditions, items subject to the EAR that would otherwise require a license.

Deemed export exemptions are limited but if the criteria can legitimately be met, the U.S. person does not have to obtain a license even though the technology otherwise qualifies as a deemed export.

Three list-based license exceptions apply most often to deemed exports and should be carefully reviewed by the U.S. person to determine whether any specific exemption is applicable to their situation before claiming the exemption.

CIV: Civil End Use (EAR §740.5)

• • Authorizes the export of dual-use technology to civil end-users for civil end-uses

• • Requires Foreign National Review (FNR) 1

TSR: Technology/Software Under Restriction (EAR §740.6)

• • Applies to technology and/ or software under national security only for country group “B” nationals

• • Authorizes that certain technology and source code can be released to foreign nationals inside the United States provided the recipient provides the exporter with a letter of assurance that certain subsequent disclosures will not occur.

• • Requires Letter of Assurance 2

APP – Applied Peak Performance (EAR §740.7)

• • Applies to deemed exports for software and technology. (FNR required)

• • Authorizes the release of national security controlled high performance computer technology and source code.

• • Requires Foreign National Review (FNR) 1

1 Foreign National Review (FNR) (EAR 740.5)
Prior to disclosing eligible technology to a foreign national under this license exception, a Foreign National Review (FNR) request must be submitted to BIS, as required under §748.8(s) of the EAR. The FNR request must include information about the foreign national required under §748.8(t) of the EAR and set forth in Supplement No. 2 of part 748 of the EAR.

2 Letter of Assurance
Unlike commodities, which can be seen and tracked, the export of technology requires additional safeguards to insure that an advanced U.S. technology is not permitted to end up in the wrong hands. The letter of assurance puts the consignee on notice that the technology is subject to U.S. export controls and causes him to certify that he will not release the data or the direct product of the data to certain specified country group nationals; thus providing assurance that U.S. national security data will be safeguarded and used only for the stated end use.

Supplement no. 2 of Part 748(o)(3)(i) defines the “Letter of Assurance” as a written letter from the ultimate consignee assuring that, unless prior authorization is obtained from BIS, the consignee will not knowingly re-export the technology to any destination, or export the direct product of the technology, directly or indirectly, to a country listed in Country Group D:1 or E:1 (EAR Supplement No. 2 to part 740).

Because of the broad application of the deemed export rule and intensified enforcement efforts by the various governmental agencies targeting releases of technology, it is crucial U.S. businesses develop a comprehensive and meaningful export management & compliance program (EMCP) and a Technology Control Plan (TCP). These programs should include development of internal procedures that insure the security of technology while also allowing for the reliable determination of whether export licenses are needed, and identifies the process on how to obtain a license for a deemed export. Such procedures are necessary not only to prevent accidental violations of the EAR, but to also allow U.S. companies the ability to operate in the global economy while also allowing them to employ and work in concert with foreign nationals and consultants in a timely manner.

Without a doubt it is in the exporters’ best interest not to become an “Accidental Exporter” of controlled technologies, or any controlled item for that matter. Penalties and fines for non-approved deemed exports can be a bitter pill to swallow.

For example, willful criminal violation of any provision of the EAR is subject to up to 20 years imprisonment and a $250,000.00 fine for individuals, $1,000,000.00 for corporations. Civil penalties and fines are up to $250,000.00, or twice the value of the transaction whichever is greater, and applies retroactively to the violation. Additionally civil violators face the loss of export privileges and revocation of any existing export licenses.

For more information about deemed exports and how to protect yourself visit BIS’ Deemed Export FAQ by clicking Here. http://www.bis.doc.gov/deemedexports/deemedexportsfaqs.html

Best Regards,
W.J. Yennie
V.P. – Exports/ NVOCC
J.W. Allen & Co., Inc.